COVID-19 has accelerated many dramatic trends in retail. One thing has become clear: if many retailers want to survive, their rental structures may have to change.
One idea that is gaining in importance is percentage leasingwhere the retailer pays a minimum rent and a percentage of its sales in rent.
Landlords have traditionally opposed percentage rents because they rely on income security that affects their valuations. Tom Whittington, director of retail and leisure research at Savills, tells S&P Global Market Intelligence.
"The new arrangements we've made over the past four months are not necessarily meant to be an integral part of landlords, but rather a way of addressing the current challenges in the industry," Whittington told S&P.
However, others are of the opinion that rental structures must change permanently. "The pandemic has shown that many leases need to be more flexible in order to better cope with significant business interruptions," said Omar Eltorai, market analyst at Reonomy.
With widespread adoption, there are a few questions that need to be answered, including which sales to include in the retail calculation. Should it be the brick and mortar transactions? Or should online sales also be included in the analysis?
As omnichannel sales strategies become increasingly popular, the division between online and brick-and-mortar stores is blurring. For example, retailers allow consumers to return items purchased online in their physical stores.
Nick Gardner, executive director, head of advice and transactions in UK retail for CBRE, told S&P Global Market Intelligence that the retailer "needs to recognize the role of physical business in rental alongside click and collect online returns, Brand improvement and the halo effect on online sales. "
While retailers generally have low margins when selling online, there is evidence that physical stores can increase those sales. according to The Wall Street Journal.
The WSJ cited a study by the International Council of Shopping Centers that found a brick and mortar store in one area could increase traffic to the retailer's website by 37%.
The effectiveness of percentage leases also depends on the type of retailer. S & P's Cathal McElroy writes that fashion retailers have most likely asked for adjustments to their lease. Additionally, leisure, food and beverage businesses fit well into the percentage structure as the property's relationship to the sales made is more direct.
